Friday Losers: MEMC Wins Market Share, But Loses Investors

In cost-competitive markets, managements often need to decide to pursue either market share or firm pricing. One approach can preclude the other. Management at MEMC Electronic Materials (NYSE: WFR), which had been smarting from lost market share in recent years, chose to win back customers - at the expense of price. Bad move. First-quarter sales were above plan, and the volume of silicon and solar wafers (used to make chips and panels, respectively), were well above analysts’ forecasts. But that’s because of a decision to low-ball pricing, which crushed profit margins. The net result: a small loss instead of an expected small profit.

I thought management would be able to finesse the dynamics between profitability and market share when I wrote this piece in mid-March. Management maintains that profit margins will eventually rise as there is now more room for price increases. But investors remain dubious, pushing shares down nearly -15% this morning. At a minimum, shares are dead money for at least the next three months, until management can prove that MEMC can take market share and bolster profit margins.

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As part of the healthcare overhaul, Uncle Sam envisions a much better usage of internet-era technology in doctor’s offices to save money when processing medical information. And that led investors to flock to companies such as AthenaHealth (Nasdaq: ATHN) that provide web-based medical software. Those hopes may ultimately prove to be correct, but growing pains in this still-nascent market should be expected. AthenaHealth is surely feeling them: sales rose at a nice clip in the first quarter, but expenses are also growing quickly. Too quickly for many investors, who pushed shares down nearly -20% in Friday trading.

Even after the sell-off, shares still trade for more than 35 times projected 2011 profits of around $0.80 per share. (The consensus forecast of $1.15 is likely to come down). Rival Allscripts-Misys (Nasdaq: MDRX) also looks fairly expensive on an earnings basis, and investors may eventually also mark that stock down if they see AthenaHealth and Allscripts as suffering from the same growing pains. Allscripts won’t weigh in with quarterly results until late June.

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Shares of McAfee Software (NYSE: MFE) are also down double digits this morning after the company missed analysts’ forecasts. The quarterly shortfall was fairly minor, and a lack of management credibility is the real culprit. McAfee’s anti-virus software accidentally crashed a lot of Microsoft-based computers by poorly identifying a new feature in the latest Windows operating system as a bug. The issue was poorly communicated to investors, leaving analysts red-faced with anger. Analyst emotion can often dictate a rating, and in this case, the damage is more limited than the sharply negative analyst reaction might indicate. Of course, the company will need to woo back those analysts for shares to rebound.

Shares of McAfee appear very reasonably priced at around 12 times next year’s profits, which assumes that the current consensus profit forecast will fall from $3.00 to around $2.90 in coming sessions. Once the analyst anger abates, the long-term growth dynamics of the company should come back into focus, pushing shares back up past the $40 mark. It’s important to remember that we may be on the cusp of a strong PC upgrade cycle thanks to Microsoft’s new operating system, and McAfee would be a clear beneficiary of such a spending upgrade.